June 2009

Listen live: xxx

by Philip Shaw, B.Sc.(Agr.) M.Sc.

Market Trends

U.S. and The World
With planting wrapping up across the United States and in Ontario summer weather will surely determine whether we can make up for the very difficult planting conditions we had this year in the Eastern Corn belt. Much of the corn that was planted in Illinois, Indiana and Ohio went in under difficult planting conditions. However, in the western Corn Belt, conditions were close to ideal and ultimate yield will surely depend on how these two areas mesh together at the end of the growing season.

The June 10th USDA World Agricultural Supply and Demand Estimates (WASDE) were neutral for the corn market. However, the USDA did lower corn production for 2009/10- 11.9 billion bushels, down 155 million bushels from their May projection. The USDA also lowered expected yield down to 153.4 bushels per acre down from 155.4 bushels per acre that they had projected in May. These lower estimates were partly the result of the difficult weather and planting conditions in the Eastern Corn belt.

Old crop ending supplies for the year 2008/09 were capped at 1.6 billion bushels and world ending stocks for 2008/09 or lowered 1.04 billion bushels 238.54 billion bushels. Corn usage for ethanol in the United States was maintained at 4.1 billion bushels for 2009/10, but feed use was actually dropped 100 million bushels from the May USDA report. USDA is projecting total corn usage to be 12.5 billion bushels and this will exceed production by 525 million bushels, which will draw down stocks sharply to 1.1 billion bushels, down 55 million from last month and 510 million bushels below the 2008/2009 projections.

As of June 14th the July 2009 corn futures finished at $4.25 a bushel, Sept 2009 corn futures finished at $4.34 a bushel, and December 2009 corn futures finished at $4.47 a bushel. Looking far into the future the December 2010 corn futures finished at $4.50 a bushel. The July to September 2009 futures spread closed at 9 cents on June 14th, which represents a neutral to bearish full commercial carry of 70%.

U.S. Cattle and calves on feed at feedlots of over 1000 totaled 11.135 million head on May 1st, 2009, down slightly from the 11.684 million head on May 1st, 2009.

The nearby July 2009 oil futures on June 14th closed at $72.04/barrel up sharply from the nearby futures in May of $56.34/barrel. The nearby July 2009 Ethanol futures finished at $1.78/US gallon on June 14th, up from the nearby future last month, which was $1.67/US gallon.

The Canadian dollar noon rate on June 12th was .8947 U.S. up 4.4 cents from the May report. The Bank of Canada's overnight lending rate remained at .25% the lowest the Bank has ever set.

Ontario
The situation on the ground in Ontario corn country is very fluid. The big news regarding basis for Ontario corn was the move to an "import basis "last month. However, it should be pointed out that the move to an "import basis "is a bit different than what we have come to understand in the past. The move to an import basis for corn earlier in the season than usual came because of the meteoric rise of the Canadian dollar. I mentioned this last month but since then the dollar actually moved to almost $.93 on June 1 from its low of $.77 US on March 7. This has made US corn much cheaper in the Canadian market essentially putting us on an import basis. The difference from the past is there is still lots of old crop corn in Ontario bins; reluctant farmer selling keeps it there even while the Canadian dollar moved higher.

Eastern Ontario continues to be the most corn deficient area. Like last month corn continues to be imported into eastern Ontario from the Toronto area. This is all taking place at a time when plenty of US corn is available in the traditional markets that would feed southwestern Ontario.

The key question for the new crop corn in Ontario is the crop size and the crop health. For instance as of June 14 how much corn has been planted in Ontario? Last year there was approximately 1.72 million acres of corn in Ontario. At the present time private estimates have pegged 2009 Ontario corn acres at anything from 1.5-1.74 million acres. With the crop going in late, private yield estimates have actually decreased from last year's record of 156 bushels per acre. If we take in a mid range estimate of 1.6 million acres and 140 bushels per acre, as of June 14th, we might expect 224 million bushels of corn this fall in Ontario, much smaller than last year's 270 million bushels.

The wonkish spring planting conditions within Ontario will surely affect our final yield. Key will be how short season heat unit areas respond throughout the summer. For instance corn in the Barrie, Peterborough, Lindsay and Mount Forest areas is in the two to three leaf stage as of June 14th. Also too, heavy rains and poor planting conditions in the areas north east of London like Stratford, Milverton and Listowel may challenge corn yields going forward.

The Ontario 2009 corn yield number is key. Early yield estimates based on the where we are as of June 14th are approximately 140 bushel/acre plus or minus 5 bushels. However, lurking within that number is a much lower fertilizer usage rate in 2009 versus 2008 and previous years. How this will manifest itself at fall harvest may or may not be telling. Another explanation for this might be fertilizer that was sourced from nontraditional outlets this past spring. Needless to say, it is a hidden factor within the cornfields of Ontario this year.

Old crop corn elevator bids as of June 14th are currently in a range provincially at approximately $4.46 to $4.81 per bushel, which is about the same from last month's report.

All corn prices can be accessed by clicking here.

The Bottom Line
So when will the crop be made? At this time of year that's a question that is usually in traders' minds. Each spring we usually have a traditional rally, which tops out into June. We have had that this year and usually around this time of year market action gets violently volatile as the market decides whether we will hit trend line yields are not. 2009 may be similar than past years, however the delayed planting in the Eastern Corn belt has surely caused much angst going into summer. The June 30 USDA planted acreage report will surely serve as the litmus test going ahead for this market.

In many ways the corn market with regard to futures is the tale of two markets. The old crop market has come way down off its highs last summer, but at the end of the day still has a 1.6 billion corn ending stock. The new crop is a totally different picture with total usage outstripping expected supply with ending stocks more and more looking to be ending up at 1 billion bushels. Some analyst arguing that this (2009/10 and beyond) may represent the next great bull market for corn.

This is supported by the fact that the ethanol complex has been more profitable lately with the run-up in oil and gasoline prices. Although the ethanol complex has been on shaky ground in the United States with higher corn prices, a slight turnaround in the economy has been good news. This at least for the short term will stabilize the demand for corn through ethanol.

In the June 30 USDA planted acreage report look for a reduction in corn acres possibly 1.5-2 million acres down from the 85 million reported in the May in June projection. This would put corn acres at about 83.5 million going into the summer. The market has obviously factored in a reduction in corn acres going into the report. Use that as a litmus test for your own marketing plans. If the actual planted acreage shows a wide divergence from the 85 million acres on June 30th, the market will push or pull violently.

In Ontario there's a big difference between old crop and new crop of corn. For instance in the eastern part of Ontario corn has almost completely been cleaned out. There has been corn shipped into Quebec and the Maritimes and corn is being replaced from Western Ontario. Basis in eastern Ontario should continue to be strong until new crop supplies come off. In western and southwestern Ontario it a bit of a different story as basis is not as strong with still much corn in the bin even though we are up against an import ceiling. Old crop corn has been in tight hands but eventually will be drawn out for wheat or higher basis values.

The great uncertainty at this point is what new crop Ontario supplies will do with a summer full of risk before us. At the present time predictions are a good 16 bushels per acre less than what we came in at last year. If we have a drought event or any type of production problem going forward this will worsen cutting the Ontario crop further. Also too, traditional import areas like Michigan and Indiana and Ohio will have less acres of corn and probably lower yields. Québec also got off to a late start planting corn and their yields will be down too. This sets up the scenario for new crop basis appreciation sooner rather than later into 2010. The next eight weeks will surely go a long way to telling that story. With our late start to this growing season, we do not want a September 15th frost especially in our short heat unit areas.

One of the biggest factors affecting our Ontario corn price over the last few months has been the increasing value of the Canadian dollar. The loonie rose 17% from March 7 to June 1 and has since fallen back a bit. The loonie has an inverse relationship with the American dollar as well as a direct relationship with the price of oil. Traditionally, when the American dollar goes down, corn and oil goes up but at the same time the Canadian dollar goes up. Producers need to monitor these variables carefully as their interaction are key into the price discovery mechanism for corn.

Key dates to watch are June 30 and the July 4 weekend. Traditionally, prices have exploded near these dates on the calendar. This year old crop soybeans have the capacity to pull corn along with them as they are at record lows with regard to ending stocks and available supplies. Also too, we all know what too much hot and dry does especially to corn, which didn't go in the ground under optimal conditions.

At this time of year uncertainty for the future corn crop is usually at its greatest. Added to it this year is the uncertainty with regard to our global economic recovery. Is hope on the way? With a recovery in the offing coupled with some mildly bullish new crop fundamentals there could be a real argument made for increasing corn prices into 2010. However, as we all know right now and for at least the next six weeks, it's "all about the weather". We saw last year that a late start might mean nothing in the end. However, the variables are different this year. Both on the old crop and new crop side of the corn equation, there will be opportunities and challenges.